Friday, September 23, 2016

Bloomberg News reported the Mississippi Public Employees Retirement System is the tenth most under-funded retirement plan out of all fifty states. The news service reviewed and ranked all state retirement plans in an August article. The top ten offenders were:

32 comments:

Anonymous
said...

As a state employee, I want the state to increase my contributions. I can (and do) hedge my bets individually with an IRA, but I can't do anything individually to stop PERS from failing. It's time to stop kicking the can down the road, get serious, and do the math.

The answer is to end new enrollment and allow current employees to opt out. There comes a point when you have to cut your losses. The current contribution rate for the state is over 15%. Start a 401(k)/IRA and match at 7-9%. You are saving the state a huge amount of money and reducing the state's obligation long term. That's still a good retirement plan (one of the few incentives for working in state government). I trust PERS as much as I trust the Social Security Administration in terms of providing for my retirement.

The pension issue is a time bomb, and when it blows, it is going to be ugly. In addition to the underfunded state pensions, you have municipal (think police, fire and school) as well as corporate pensions (Google "Central States Pension Fund" for a small-scale example of what is in store).

The reference to a Ponzi scheme above is apt. That is effectively what many (probably most) pensions have become (including Social Security, but that is for another conversation). States, munis and private enterprises are taking in contributions from the currently-employed and using those funds to pay retirees. Why?

1. People are living longer, thus the benefits paid out are more than these pensions originally estimated.2. The returns on invested contributions are lower than these pensions estimated. This is because they are using rate of return projections that are outdated. In an era of artificially-suppressed rates of return (thank you, Fed), it is hard to earn a safe and healthy return on invested capital.3. Politicians and businesses have perpetually underfunded these plans because they want to please taxpayers or investors. Increasing the contribution requirements of government employees or raising taxes on everyone in order to fund pensions makes EEs or taxpayers cranky. No good politician wants cranky taxpayers, so just kick the can down the road and get re-elected.

So, how does it end? Here is my take: In 10-15 years we will see a wave of pension plans going totally broke. People who had paid into these plans for decades will be faced with the possibility of getting nothing from their pensions in retirement. This will affect tens of thousands of people.The uproar will be huge. PBGC? Ha! Forget about it (http://blogs.wsj.com/cfo/2016/03/31/pbgc-raises-possibility-of-program-insolvency/). So, the Federal government will step in and supplement these individual plans - at first. Whether the beneficiaries get 100 cents on the dollar that they were promised? I don't know. In any case, as time goes on and more of these funds collapse, it won't make sense to backstop each one individually, so the Fed will either expand Social Security or create some sort of new universal program to cover all of these liabilities and pay retirees who have been shafted. Where does the money come from to pay for all of this? Either a) higher taxes or b) more Federal debt - which eventually results in higher taxes. Eventually individual income tax rates will approach 50% on the high end. This, my friends, is how the U.S. turns into a European welfare-state look alike.

Keep your eye on Illinois. That will likely be the first big domino to fall. If the Fed backstops the Illinois plans (or some other state, muni or private plan), it's all over. Any other pension that fails will point to that as the precedent.

Benefits cannot be reduced once the employee has retired. Retirement formulas are set by state law. It takes years for reductions to impact the system because only new hires can have their benefit formula reduced. it is very difficult to get anything through the legislature since the have an incredible vested interest in PERS (2 retirement plans). PERS has made poor decisions. They have increased benefits to curry favor with the legislature. 15 years ago PERS was in the top 10 defined benefit plans in the US. It will take another 15 years to restore its soundness.

However, I find it sadly humorous that there are people who believe that retirement formulas set by state law somehow protect their retirement income. The only law that matters is the law of reality, and when the money runs out, reality is going to suck for a lot of people.

The legislature sets the retirement formulas. Subsequently, the legislature chooses NOT to increase employee contributions despite the fact that actuarial forecasts say that the fund is going to run dry. Nor does the legislature choose to allocate more of the state budget to funding the pension because that would either divert money from other areas of the budget or require taxes to go up. So, the legislature that puts the retirement formulas into law (or votes to keep them there) is the same one that make decisions to push the pension into insolvency.

Recently, you have spotlighted various Stockbrokers who have charged excessive fees. Please let us know who the brokers are that are getting the commissions and how much are they receiving. There obviously has to be transparency, as we have seen from numerous reports. (Some of the previous disclosures are evidenced from advertising on this site.)

The stock market (Dow industrial) is up 69% for the last 5 years. Bonds have been very steady and have had growth over the same time period. How can any reputable investment managers invest so that these are underfunded?

The legislature refuses to fund the promises that they have made. Surprised? They just need to set the contribution rates appropriately. And require better management. And stop new enrollments. Either that, or default in 20 years. But like always, they will kick the can and probably default in 20 years.

This has much less to do with the returns on the fund than it does with the amount of funding from employees and the state. 1.56 PM makes a good point that the politicians like to blame the stock market for these problems, but that is their smokescreen. Stock market returns or not - they still need to fix the problem, which means either more employee contributions or more state-funded contributions. Neither of those are politically popular options.

That being said, I don't know what the returns have been on the PERS, but it should be public info. Perhaps Kingfish would be kind enough to post a link to that. Bear in mind that the entire portfolio can't be invested in stocks, so assuming that the return on DOW is a valid proxy is misleading. A significant chunk must be invested in fixed income securities, which are directly affected by the Fed's ZIRP, thus depressing returns.

The single biggest hit PERS ever took to its funded status was because of the Legislature. All those benefit increases they added in the late 1990s were retroactive. So someone who had started working in, say, 1970, and who probably put in less than half of what the employees today put in, got to get a huge COLA upon retirement without ever paying for it. And I'll bet they gave their legislators undying loyalty for it.

I'd be interested in knowing how much just that retroactive thing cost -- basically, the difference if the benefit increases had been prospective only, and not included people who were already retired -- since it's the people working right now who have to pay for it.

Attn 2:31, you have identified yourself as possibly one of if not the only one getting massive fees from these failed investments. I am not involved, but why don't you admit your massive failure. It is nice that you make a wonderful living, but why are the the state employees suffering because of your greed when you could provide them good returns on their hard earned retirement investments?

pers started going down the toilet in 1999 when the state legislature increased benefits without the funding to support the increase. then the market slowed down and the plan stopped producing 8% annual returns consistently. and it's only going to get worse. more retirees living longer with annual cost of living adjustments that very few working state employees are going to receive. but as long as legislators continue to vie for cushy high 4 appointments, supreme court justices get to include their expense allowances as compensation for pers, and retirees continue to vote and vote out of office any politician who dare whisper about pension reform (rip nancy collins), the death spiral will continue. self over service.

PERS can't increase benefits. The legislature did so in 1999 when everyone thought there would be double digit returns in the stock market forever Pat Robertson repeatedly points out that the legislature increased the benefits without providing a way to pay for it.

The market returns have been fairly decent over the last several years. The problem lately has not been the rate of return.

Also keep in mind that when state government is reduced, the number of employees paying into the system is reduced as well.

It's not up to Phil Bryant or Lynn Fitch to solve this problem. If you want to blame a Treasurer, take a look back at Tater.

In the best of all worlds, it's a great system and was once the healthiest in the nation (back in the seventies and eighties).

Not only were employees allowed to draw full retirement early (some years back), when they die, if they chose a particular option, their wife can draw the same amount for the rest of HER life. Clearly, under that option, the retiree and family member will draw ten to twenty times more than his/her contributions.

If PERS were your family finances, you'd either have to bring in more money, limit the amount you spend or face bankruptcy.

Seems to me, the options are as follows:

1) Change the retirement options (with reasonable grandfathering) so that the risk is less that retirees will suck out many times their contributions.

2) Increase the contribution rates.

3) Delete the SLRP and Highway Patrol special benefit programs as well as tool-out other bleeders including stopping the 'lump sum withdrawal' option. Sooner or later these become real money.

4) Bitch, moan, blame others.

5) Pray

6) Do Nothing, punt, kick the can.

And by the way, a Ponzi Scheme is one which is intended to be fraudulent, benefiting only its operator. Of course most all retirement plans, including SS, are similarly structured, but with periodic and sensible tooling can last forever.

As a state employee I have no problem seeing employee contributions go up. I also don't think that I should be able to retire in my mid-forties and collect retirement for longer than I worked. However, state retirement has been the carrot that has been used for years to justify low state salaries and the one tiny carrot for teaching in this state. PERS needs to be fixed, but that also means that there needs to be an incentive for working for the state and not having a raise in 9 years isn't going to do it. New employees are already not swayed by the allure. They don't believe they will ever have it, so when they are offered a better job in the private sector for more money and fewer benefits they often take it.

My husband nor I would have never considered retiring at 25 years. Now, I feel like we have no choice because we will need to cut our future losses by starting second careers and banking what retirement we can get to at least have some of what we were promised. And, all of that will be likely be done in a border state where we can take our expertise and automatically make 20% more than we are here.

I always like to remind folks: Back about 20 years ago when the legislature was secretly attempting to push through a bill that would have effectively doubled their own retirement, Rita Martinson (Madison County), now retired, when confronted, in her best Nancy Pelosi voice said, "I voted for that but had not read the bill".

The one thing that has kept the system halfway-solvent for all these years is the fact that the legislature can not get their hands on the money.

Look at the state job listings. The salaries are pitiful. People work in state government because they are compensated by a good retirement system. If it goes broke, these people are screwed. The legislature has their own special retirement system, in addition to the regular state retirement system. It is, of course, well funded.

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